MEIDONG AUTO(1268.HK)：WE EXPECT 1H24 TO BE STILL PROFITABLE-格隆汇

机构：招银国际
研究员：Ji SHI/Wenjing DOU

　　Maintain BUY. Despite strong headwinds that dealers faced, we still project Meidong’s 1H24 net profit to be positive with subsidies from Porsche and Lexus. We expect industrywide headwinds to continue in 2H24 but we believe investors could turn a bit more positive on Meidong’s FY25 outlook given removal of the convertible bond (CB) burden and a new NEV model cycle for BMW.
　　We project 1H24E net profit to be RMB43mn assuming no significant impairment. We project Meidong’s new car sales volume in 1H24 to fall 8% YoY to 29,200 units (Porsche: 4,500 units, BMW: 11,500 units). We expect Meidong’s market share for Porsche’s sales in China to widen to 17% in 1H24 from 16% in 2H23, despite Porsche’s 39% YoY plunge in its China’s sales volume in 1H24. We project Meidong’s new car average selling price to decline 13% YoY in 1H24 amid rising discounts. We forecast Meidong’s after-sales service revenue to rise 12% YoY despite lower number of services occurred. We expect Porsche to contribute a higher portion in after- sales service revenue. More importantly, auto finance commissions per car (included in the after-sales revenue at Meidong) increased YoY based on our channel checks.
　　We project Meidong’s new car gross margin to fall to -3.7% in 1H24 (Porsche: -4%, BMW: -7%, Lexus: -2%), the lowest in history. Accordingly, we project Meidong’s revenue to fall 15% YoY and gross profit to drop 11% YoY in 1H24. We assume a YoY drop for interest expenses with partial CB buyback and a withholding tax of RMB35mn in 1H24. Therefore, we estimate 1H24 net profit to rise 9% YoY to RMB43mn.
　　2H24 and FY25 outlook. Although low visibility and close-to-zero net margin make our forecast much more difficult, we expect 2H24 and FY25 to be slightly better than 1H24. We expect gloomy Porsche sales volume to continue in 2H24 but gross margin to recover slightly amid lowered sales target. We assume new car gross margin at Meidong to improve by 1.2ppts YoY in FY25, as foreign automakers are likely to cut sales targets. We also estimate CB interest expense and withholding tax to reduce by RMB130mn YoY in FY25, leading to a net profit of RMB360mn on our estimates.
　　Valuation/Key risks. We maintain our BUY rating but cut target price from HK$4.00 to HK$3.00, based on 10x our revised FY25E EPS (previously 9x FY24-25E average EPS). We are of the view that investors could turn a bit more positive on Meidong’s FY25 outlook as noted above. Key risks to our rating and target price include lower sales and/or margins than expected, as well as a sector de-rating.